(Bloomberg) – In an era of historic inflation, an alternative investment has made its way into portfolios as a diversifier and potential hedge against stubborn price pressures: farmland.
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“It actually turns out to be more inflation-linked than gold in the sense that in times of high inflation or persistent inflation, it tends to outperform,” said Carter Malloy, Founder of AcreTrader, an Arkansas-based farmland investment firm. “And also that there just isn’t a lot of correlation with other asset classes. It’s almost exactly zero in its correlation with the S&P.
Malloy joined the What Goes Up podcast to talk about the business and the farmland investing process. Here are some highlights of the conversation, which have been condensed and edited for clarity. Click here to listen to the full podcast or subscribe below on Apple Podcasts, Spotify or wherever you listen.
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Q: How does AcreTrader work and what is your investor base?
A: These are accredited investors on the platform – ranging from city dwellers to farmers in rural areas and people living close to agriculture, to institutions as well – family offices etc. The goal for most people is to find some stability and diversification. That’s often the reason we see people who really care about farmland – that slow, steady compound it can offer investors.
Q: And it’s not really correlated with risky assets or even Treasuries. It is correlated with inflation to some extent. Tell us about what you can expect from this return profile and volatility as a farmland investor.
A: First, it is important to consider what farmland is not. Farmland is not a get-rich-quick scheme. You rarely hear people say, “oh my god, I doubled my money on my farmland investment this year.” Conversely, you also don’t hear people say, “Oh my God, I lost all my money on farmland this year. So what investors are often looking for is that slow, steady build of capital. And those returns, it’s been a pretty consistent double-digit return – 11% or 12%. Nothing, ‘oh my God.’ But when you compare it to other mainstream asset classes, this return profile is quite similar over long periods.
What is more fascinating is the consistency of these returns. You don’t have big, huge up years and huge down years like you do in so many other mainstream asset classes. So the consistency of returns and this relative lack of volatility means that the Sharpe ratio of farmland can be very, very attractive – the risk-adjusted returns there. And on top of that, there are a few key themes. The first is that it can be linked to inflation. It actually turns out to be more inflation-linked than gold in that in times of high inflation or persistent inflation, it tends to outperform. And also that there just isn’t a lot of correlation with other asset classes. It’s almost exactly zero in its correlation with the S&P.
Q: I’m curious about the risk management or potential downsides of this type of investment.
A: We tend to think of the world in general as opco and propco. Your operating company is the farming business. Your real estate company owns the underlying land. And so we tend to be more like the real estate company in this scenario, whereas the farmer is the operating company. They often have insurance to back them up – often government-subsidized insurance, too. So, as a tenant and as a partner, farmers tend to be very stable over time. And as a result, we see a very low default rate in our vacancy rates across the ecosystem as an example.
There are definitely risks in this. And one of the biggest is simply taking on risk – making sure you’re actually buying farmland. And that’s really hard to do because there’s such a lack of information in our world. So we have a large data science and engineering team, for example, that helps create analytics and underlying geospatial data for us just to help inform those underwriting decisions. And we have a great team that’s partnering with farmers and looking at business by business.
Q: How has farmland been doing lately and what have prices done during the pandemic?
A: As a general statement on the appreciation side, the years leading up to the pandemic – the five or six years leading up to it – we saw relatively muted appreciation. We’ve seen some long-term catch-up – call it mean reversion – in appreciation in recent years. So we’ve seen more significant, we’ll call it double-digit growth versus your typical type of single-digit growth in the underlying asset. Rents themselves or income from the farm have generally also increased over the same period.
Click here to listen to the rest of the interview.
–With assistance from Stacey Wong.
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